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Economic Systems Fundamentals

Types of Economic Systems

• Market economies– consumers decide what is produced by the

purchases they make– businesses make production decisions– consumers earning more money purchase

more goods and services– consumers are motivated to work in order to

earn more money

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Types of Economic Systems

• Command economies– one person or group of people make

production decisions– one person or group of people owns all

businesses and runs all businesses– one person or group of people decides who

will receive goods and services produced

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Types of Economic Systems

• Mixed economies– have a mixture of the market and command

economic systems– most present-day global economies are

varying mixtures due to lessons learned over history the Great Depression of the 1930s showed

us the need for some government regulation in a free market

the collapse of the Soviet Union showed us the need for some personal freedoms in a command system

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Economic Systems• On an economic continuum, with command

economic systems far left and market economic systems far right, most countries fall somewhere in between

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Where on this continuum would you place the United States? Canada? Russia?

China? North Korea?

Communism Socialism Capitalism

Command Market

Capitalism

• Is an economic system in which:– businesses are privately owned – product development is proportionate to the

accumulation and reinvestment of profits gained in a free market

– government is usually democratic and maintains fewer social services than in a socialist country

• Is the economic system in countries including:– United States– Japan

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Socialism

• Is an economic system in which:– there is increased government involvement– the goal is to keep prices low and provide

jobs for everyone through government-owned businesses

• Is somewhat vague in its definition because of its position on the continuum

• Often proves to be a temporary phase countries go through

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Socialism

• Includes additional social services in order to secure a certain standard of living such as:– providing free or low-cost medical care– providing free education from elementary to

college– providing pensions and free care for the

elderly– forcing companies and individuals to pay much

higher taxes 9

Communism

• Is an economic system in which:– the government runs and controls most aspects of

daily life– there is little or no economic freedom– theoretically every working-age citizen is assigned a

job or continues getting paid, even if he/she stops going

– the government decides the type of schooling each citizen receives

• Is the economic system in countries including:– China– North Korea

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The Free Enterprise System

• Is an economic system which:– uses the capitalist approach– encourages people to start and run

businesses without government involvement– encourages competition

a struggle between companies an essential component of a free enterprise

system

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Fun Fact: There were over 27 million business organizations in the U.S. in 2008.

Types of Competition

• Price competition– focuses on the sale price of a product– assumes other factors are equal and

customers will choose by price• Non-price competition

– focuses on factors other than price including: product quality reputation customer service business location

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$ $ $

Degrees of Competition

• Monopolies– refer to one company controlling a

product market– have no competition– are harmful to free enterprise – are regulated by the U.S. government

• Oligopolies– are a few companies controlling a product

market– can affect price and competition

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What are some of the product markets with a monopoly or an oligopoly?

Risk• Includes the possibility of loss or failure in

relation to the possibility of increased profit in a free enterprise system

• Is a factor affecting business– new product development

close to 90 percent of new products fail

– competition once a product is on the market, other companies

scramble for a piece of the “market pie”

• Increases when profits increase

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Profit• Motivates entrepreneurs to take risks

involved in owning their own business• Is the income of a business after all costs

and expenses have been deducted– for example:

five percent of sales go to profits 95 percent of sales go to pay costs, expenses,

taxes, etc.

• Increases with lower costs and higher sales volume

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Profitable Firms

– employees increased job market increased salaries and

benefits an improved economy

– consumers increased competition

creates lower profits, higher quality and better services for consumers

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• Positively affect and benefit:– the government

increased salaries increased business

profits increased money

from taxes– investors

higher dividend returns

Unprofitable Firms• Negatively affect the economy with:

– costs to employees higher unemployment salary cuts

– costs to investors loss on investment when stock price

dips too low selling stocks at a loss, creating an unstable stock

market

– costs to the government decreasing taxes decreasing funds available to social services

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Supply & Demand

• Supply– is the amount of a product available to the market;

stock– according to the law of supply, as product price

increases, the product quantity increases; causing a positive slope

• Demand– is the consumer’s willingness to buy a product– according to the law of demand, as product price

increases, the demand for the product decreases; causing a negative slope

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Supply & Demand Schedules

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Supply Schedule for Leather Jackets

Price per Jacket$300$250$215$175$140$115$95

Number Supplied7,4004,7804,3303,4002,8602,3001,890

As price increases,

supply increases

Supply & Demand Schedules

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Demand Schedule for Leather Jackets

Price per Jacket$300$250$215$175$140$115$95

Number Demanded1,6502,1003,8804,9005,7256,7807,600

As price increases,

demand decreases

Supply & Demand Curves

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surplusshortage

Supply & Demand• Interactions in the marketplace result in one of

the following:– surplus – when a product is produced in larger

quantities than it is demanded– shortage – when a product is demanded in larger

quantities than it is produced– equilibrium – when the quantity of a product supplied

matches the quantity demanded can be found at the point where the demand curve

meets the supply curve at this point, the producer and the consumer are

satisfied with the price of the product and the amount produced 22

Government’s Role in Free Enterprise

• Is providing four functions including:– basic social services– business support– business, individual and resource protection– competition

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Basic Social Services

• Provided by the government include:– protection provided by the military, police and

fire departments– public education– medical care for the poor and the elderly– transportation infrastructure

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Fun Fact: Public elementary and secondary schools across the nation spent about $525 billion for the

2011-12 school year – more than $10,500 per student!

Business Support

• Provided by the government includes:– relief in the event of disasters (i.e., droughts

or hurricanes)– trade alliances with other countries

North American Free Trade Agreement (NAFTA) opened trade in North America by lifting tariffs and gradually reducing trade barriers within Canada, the United States and Mexico

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NAFTA affected the trucking industry, as well as the agriculture industry. Do you think these affects were positive? Could the affects have been negative?

Protection

• For businesses, individuals and resources are provided by the government through departmental regulation such as:– Food and Drug Administration (FDA)– Occupational Safety and Health

Administration (OSHA)– Equal Employment Opportunity Commission

(EEOC)– Environmental Protection Agency (EPA)

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Competition

• Is provided by the government through its own business operations such as:– U.S. Postal Service– AMTRAK– Tennessee Valley Authority

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Fun Fact: In 2011, the U.S. Postal Service had over 550,000 career employees and delivered

over 160 billion pieces of mail.

Consumer Role in Free Enterprise

• Two main functions :– attaching popularity to products

consumers ultimately decide what products (and businesses) survive by making purchases

– determine the supply and demand for each product by buying more or less of a product, consumers

establish a supply and demand schedule for the given product

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Economic Success

• Can be measured in several ways including:– employee productivity– gross domestic product (GDP)– rate of inflation– consumer price index– producer price index– unemployment rate

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Employee Productivity

• Measures the output per hour of individual employees for a defined time period

• Can be increased by:– furnishing new equipment or facilities to

support better efficiency– arranging for more training or financial

incentives– decreasing employee ratio and giving more

responsibilities to remaining employees

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Gross Domestic Product

• Is also known as GDP• Is the total output of goods and services

produced in a country

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What does this graph say about the GDP trend in the United States during this period?Source: Bureau of

Economic Analysis of the U.S.

Department of Commerce, 2012

-10

-8

-6

-4

-2

0

2

4

6

1.3

-3.7

-8.9

-6.7

-0.7

1.7

3.8 3.9 3.8

2.5 2.3

0.41.3

1.8

3

Perc

enta

ge (

%)

2008 2009 2010 2011Year

Rate of Inflation• Is the rate of rising prices in a country• Is usually attributed to the volume of money

and credit relative to available goods and services

• Signifies a stable economy when low, but an unstable economy when high

• Is managed by the government by:– raising interest rates to keep people from

borrowing money higher interest rates slow economic growth, thus

slow down the rise of inflation

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Consumer Price Index (CPI)

• Is used to measure inflation– measures price changes of about 400 goods and

services used by the average household including: food and beverages housing apparel transportation medical care recreation education and communication

• Is sometimes called a cost-of-living index33

Consumer Price Index (CPI)

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Source: Bureau of Labor

Statistics of the U.S. Department

of Labor, 2012

How would you describe the inflation rates from 1981 to 2011?

1981 1986 1991 1996 2001 2006 2011-2

0

2

4

6

8

10

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Producer Price Index (PPI)

• Is also used to measure inflation– measures the selling prices received by

domestic producers • Is considered the trendsetter of the two

since consumer prices generally follow producer prices

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Fun Fact: The Producer Price Index was called the Wholesale Price Index from the program’s inception

in 1902 until 1978, when the name was changed.

Unemployment Rate

• Is the amount of people without jobs• Is tracked by all countries• Means economic decline when high• Means economic expansion when low

– with more people working, there are more people spending money and paying taxes

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Economic System FundamentalsAssessment

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Assessment

1. Which of the following is an economic system in which businesses are privately owned and profit is gained in a free market?

A. SocialismB. CommunismC. CapitalismD. Monopoly

2. Which of the following is the economic system in countries such as North Korea and China?

A. SocialismB. CommunismC. CapitalismD. Monopoly

 

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Assessment

3. The amount of product available in a market is known as which of the following?

A. SupplyB. DemandC. ResourcesD. Stock

 4. Which of the following occurs when the quantity of a product

supplied matches the quantity demanded?A. Gross domestic productB. ShortageC. SurplusD. Equilibrium

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Assessment

5. Which of the following is the total output of goods and services produced in a country?

A. Gross domestic productB. ShortageC. SurplusD. Equilibrium

Internet Links

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World Trade Organizationhttp://www.wto.org/index.htmProvides information and facts on the World Trade Organization and its members

U.S. Department of Laborhttp://www.dol.gov/Provides data for unemployment rates and CPIs

U.S. Bureau of Economic Analysishttp://www.bea.doc.gov/bea/di1.htmProvides GDP data and data on international trade

U.S. Census Bureauhttp://www.census.gov/Provides statistical data on numerous topics including business

Resources

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Farese, Lois S., Grady Kimbrell, and Carl A. Woloszyk. Marketing Essentials. New York: Glencoe McGraw-Hill, 2002.

“Fast Facts: Back to School Statistics”. NCES.ed.gov, June 5, 2012. http://nces.ed.gov/fastfacts/display.asp?id=372

Heilbroner, Robert L. The Worldly Philosophers: The Lives, Times & Ideas of the Great Economic Thinkers. New York: Simon and Schuster, 1961.

Perreault, William D. and E.Jerome McCarthy. Basic Marketing: A Global-Managerial Approach. Boston: Irwin McGraw-Hill, 1999.

Terpstra, Vern, Ravi Sarathy and Debra Laverie. International Marketing. New York: Harcourt College Publishers, 2000.

“The Corporate Scandal Sheet.” Forbes.com, January 13, 2003. http://www.forbes.com/home/2002/07/25/accountingtracker.html

“United States Postal Service 2011 Annual Report to Congress”. USPS.com, June 5, 2012. http://about.usps.com/publications/annual-report-comprehensive-statement-2011/annual-report-comprehensive-statement-2011.pdf

Acknowledgements

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Production CoordinatorsAmy HoganLeah RichardsonGloria Shimanek

Brand ManagerMegan O’Quinn

Graphic DesignerMelody Rowell

Technical WriterJessica Odom

V.P. of Brand ManagementClayton Franklin

Executive ProducerGordon W. Davis, Ph.D.© MMXIV

CEV Multimedia, Ltd.